Advanced Guide

to Trading
CONTENTS

3 FUNDAMENTAL ANALYSIS
7 TECHNICAL ANALYSIS
14 INDICATORS
25 PATTERNS

Advanced Guide to Trading 2

FUNDAMENTAL ANALYSIS
“The roots of education are
bitter, but the fruit is sweet.”
Aristotle
Contents

5 What is Fundamental Analysis?

6 Economic Calendar

Advanced Guide to Trading 4

What is Fundamental Analysis?
Fundamental analysis is a method of evaluating the
intrinsic value of a security. It is done by studying
macro factors like the overall industry and economy
state, as well as micro factors like revenues, profits,
and expected growth. The goal is to produce a num-
ber that can be compared with the current price of
the security to understand whether it is overvalued
or undervalued.

As opposed to the technical analysis used for observ-

ing short-term trends, fundamental analysis is usually
applied by traders who are looking for long-term in-
vestment.

Investors employing fundamental analysis tend to

draw information from economic news, government
reports, and company financial statements.

Advanced Guide to Trading 5

Economic Calendar
Investors use an economic calendar to monitor events
that have a high probability of impacting the financial
markets, like interest rate decisions, payroll numbers,
changes in the gross domestic product, and the con-
sumer price index.

Each day in the calendar lists multiple influential

events in chronological order so that traders would
be able to research and prepare. Every event has a
volatility level that indicates the likelihood of that
event impacting the markets. Usually, there are three
levels, the highest of which means the event is ex-
pected to have a significant impact, while the effect
of the other two will depend on other factors.

Advanced Guide to Trading 6

TECHNICAL ANALYSIS
Contents

9 What is Technical Analysis?

10 Support and Resistance

11 Trend

13 Chart Time Frame

Advanced Guide to Trading 8

What is Technical Analysis?
Technical analysis is a method of attempting to fore-
cast future price movements based on a security’s
historical data. The assumption is that the price is
subject to crowd psychology, which makes it move in
identifiable patterns. The key factors to be analyzed
are price movements and volume.

Multiple technical indicators have been developed by

analysts over time. Some are focused on recognizing
the current trend, while others help determine the
strength of the trend. The most common indicators
of trend trading are:
• Moving Averages
• RSI
• MACD
• Bollinger Bands

Advanced Guide to Trading 9

Support and Resistance
A support level is where a price has the propensity
to stop and bounce back when it falls. On the other
hand, a resistance level is where a price is likely to
bounce off when it rises. The more a price touches
a level and bounces back, the stronger that level be-
comes.

Once a price breaches a support level, that level often

becomes the new resistance level. The same concept
applies to breaking out of a resistance level.

People tend to consider round numbers as psycho-

logical barriers, so trading history shows that support
and resistance levels can often occur at round num-
bers, like $50, $60 or $100.

Advanced Guide to Trading 10

Trend
An excellent way to start with technical analysis is to
understand trend patterns. Trend trading is a strategy
of buying a security when its price trend goes up or
selling when it goes down, assuming that price move-
ments will continue. Investors close their positions
only when they expect a reversal.

There are two kinds of trends. An uptrend occurs

when a price is gradually rising and is expected to
continue growing. Downtrends are the opposite of
uptrends and are associated with the bearish market.

Before a reversal breaks a trend, there is often a side-

ways pattern in-between. It is when the price goes
relatively flat for a period, indicating the absence of
a trend. However, an investor should be careful not
to mistake small ups and downs for a reversal, as they
are common for any trading price.

Advanced Guide to Trading 11

Trend
Each trend consists of four stages. The first stage is
consolidation, which occurs when the price bounces
up and down in a sideways pattern, not knowing which
way to go next. Then there is the breakout when the
2 price goes beyond the support or resistance line. That
is the earliest entry opportunity for a trader. The third
stage is the continuation. It occurs when price contin-
ues to go in the same direction. The last stage is always
3 exhaustion. The price begins to move in a sideways
pattern or completely reverses direction.

Advanced Guide to Trading 12

Chart Time Frame
Using a suitable time frame is an essential part of trad-
ing, yet there is no single answer for everyone. That is
because usually, an investor uses several time frames,
depending on their trading style. First, they try to find
a trend by observing the main time frame they are
interested in, then choose a time frame above and
below it to verify it.

A swing trader, who focuses on the daily charts,

would look for the primary trend in a weekly chart,
then choose a 60-minute time frame to recognize the
short-term trend.

A day trader could use a 60-minute chart to find the

main trend and a 5-minute chart to seek a current trend.

A long-term investor could use a 1-week time frame

to find a trend, a monthly chart to confirm it and a
daily chart to choose an entry point.

Investors should keep in mind two things. First, the

smaller the time frame, the more the chart is polluted
with noise in the form of insignificant ups and downs.
Second, it is common for a security to be in an uptrend
in one time frame and in a downtrend in another.

Advanced Guide to Trading 13

INDICATORS
Contents

16 What’s a Technical Indicator?

17 Moving Average

19 MACD

21 Bollinger Bands

23 RSI

Advanced Guide to Trading 15

What’s a Technical Indicator?
A technical indicator is a mathematical calculation
employed by traders to predict future price move-
ments based on historical price and volume data. In-
dicators either overlay on price chart data, like Mov-
ing Averages and Bollinger Bands, or they are shown
below or above the chart, like MACD and RSI. Those
that are added outside the chart are called oscillators.

An important thing to remember is that experienced

investors tend not to make decisions based on a sig-
nal from one indicator. They usually confirm with at
least one other technical indicator to make sure it is
not a false positive.

Advanced Guide to Trading 16

Moving Average
A moving average is a widely used indicator that re-
moves random price fluctuations in order to recog-
nize the trend direction and identify support and re-
sistance levels.

The basic type of a moving average is called a Simple

Moving Average. It represents the arithmetic mean
of the closing prices from a specified number of days.
For example, the 10-day moving average is calculated
by adding the closing prices from the past 10 days and
dividing that sum by 10.

Advanced Guide to Trading 17

Moving Average
Traders often use Simple Moving Averages for 20
days, 50 days and 200 days.

When a security price is above its 20-day moving av-

erage, it is a sign of a short-term uptrend. If it is be-
low the moving average, then the price is in a short-
term downtrend.

When the price is above its 50-day moving average,

it is considered to be a relatively strong uptrend. On
the other hand, the price being below the moving av-
erage is a sign of a downtrend.

The 200-day moving average is rather insignificant as

it takes too long to turn.

Overall, the strongest signal of an uptrend is having

the 20-day above the 50-day, which is above the
200-day. If the order is flipped the opposite way, that
would indicate a strong downtrend.

Besides a simple moving average, another popular

type of this indicator is an Exponential Moving Av-
erage. It has a rather complicated formula and gives
more weight to recent prices.

Advanced Guide to Trading 18

MACD
MACD is an acronym for “Moving Average Conver-
gence Divergence.” It is a trend-following indicator
that shows a histogram based on the difference be-
tween two lines: the MACD line and the signal line.
The MACD line is calculated by subtracting a 26-day
exponential moving average from a 12-day exponen-
tial moving average. The signal line is a 9-day expo-
nential moving average of the MACD itself. The his-
togram gets bigger as the two lines diverge and it
disappears when they cross each other.

When the MACD crosses the signal line, it is per-

ceived as the start of a new trend. Falling below the
signal line indicates a signal to sell, while rising above
it suggests it is time to buy.

Advanced Guide to Trading 19

MACD
If the security price starts to move in a direction dif-
ferent from the MACD, a reversal of the current trend
is likely to occur.

Sometimes, an investor might see a rapid rise of the

MACD, which indicates that the asset is currently over-
bought, but will soon return to the average volume.

Advanced Guide to Trading 20

Bollinger Bands
Bollinger Bands® are an indicator of volatility that
was developed by technical analyst John Bollinger. It
places two bands above and below a moving average.
When they narrow, it means the market is quiet and
a sharp price move in either direction becomes more
likely. If the bands widen significantly, the increased
volatility might indicate the end of an existing trend.

Almost all price movements occur between the two

bands, so when a breakout happens, some traders
consider it a trading signal. Others think that is a mis-
conception and do not believe that breakouts imply
the price is going to continue in that direction.

Advanced Guide to Trading 21

Bollinger Bands
Bollinger Bands® are not meant to be used as a
standalone indicator, as they only provide informa-
tion on volatility. It is advised to complement them
with two or three momentum and volume indicators,
like MACD and RSI.

Advanced Guide to Trading 22

RSI
RSI stands for “Relative Strength Index.” It is a momen-
tum oscillator that measures the velocity and mag-
nitude of price movements on a scale from 0 to 100.
When the index is at 70 and above, it is traditionally
considered overbought, while 30 and below is looked
upon as oversold.

RSI can be used to confirm trends. If a downward trend

is occurring, the index should be found fluctuating be-
tween 10 and 50. When the RSI breaks out of that lev-
el, it often corresponds with the breakout of the price
as well. The same goes for an uptrend, except that the
index moves between 50 and 90.

Advanced Guide to Trading 23

RSI
If the RSI line and the price line both experience trends,
but in the opposing directions, that divergence can sig-
nal a price reversal. Although, it must be noted, that
when a trend is strong, divergences are likely to appear
without breaking the trend.

Advanced Guide to Trading 24

PATTERNS
Contents

27 Cup and Handle

28 Ascending and Descending Triangles

29 Rising and Falling Wedges

30 Triple Top and Bottom

31 Head and Shoulders

Advanced Guide to Trading 26

Cup and Handle
The Cup and Handle is a bullish continuation pat-
tern. It consists of two parts: the cup and the handle.
Once the cup is completed, the handle is formed on
the right side of it. If it is followed by a breakout from
the resistance line, traders consider it a signal of an
uptrend.

This pattern can only be recognized on long-term

charts. The cup takes one to six months to be formed,
while the handle’s formation spans from one week to
a month.

Advanced Guide to Trading 27

Ascending and Descending Triangles
The Ascending Triangle is a bullish pattern that usu-
ally forms during an uptrend while the Descending
Triangle is its bearish counterpart.

For the pattern to be complete, the price needs to

bounce twice off the support level and twice off the
resistance level. When it subsequently breaks out of
the triangle, the price is assumed to continue in that
direction. It is important to note that the resistance
line for an Ascending Triangle and the support line for
a Descending Triangle must be horizontal and not in-
clined.

The strongest signals come from triangles that take

three to four weeks to form, however they could ap-
pear in shorter time frames.

Advanced Guide to Trading 28

Rising and Falling Wedges
Wedges are reversal patterns that form when price
waves move within a narrowing range. They are sim-
ilar to Ascending and Descending Triangles with the
fundamental difference being that, with the Trian-
gles, one of the two lines has to be horizontal. In a
Wedge, both lines must be inclined.

As with the Triangle, the pattern completes with a

breakout, which indicates that the price is going to
continue in that direction. If a Wedge is angled down-
ward, it is called a Falling Wedge and the prices are
expected to break out of its top line. The opposite is
known as a Rising Wedge and the breakout is typically
on the downside.

Advanced Guide to Trading 29

Triple Top and Bottom
A Triple Top and a Triple Bottom are reversal pat-
terns. A Triple Top starts when the price subsequently
bounces off a resistance level three times after being
in an uptrend. The pattern completes when the price
drops below the latest pullback low. That is consid-
ered a signal to sell, as the uptrend is over and lower
prices are on the way.

A Triple Bottom is the opposite of a Triple Top. It oc-

curs after a downtrend and indicates that the price is
no longer falling and a reversal is about to begin.

Advanced Guide to Trading 30

Head and Shoulders
Head and Shoulders is believed to be one of the most
reliable reversal patterns. It starts after a long bullish
trend when the price rises to a peak and pulls back.
Then, the price soars again to a significantly higher
peak, but declines again. Finally, the price goes up
for a third time, but only reaches the level of the first
high. It subsequently pulls back, completing the pat-
tern, which signals that the uptrend is ending and the
price is about to decline.

The first and third peaks are shoulders, while the sec-
ond peak is the head. The support level is called the
neckline.

As with other patterns, there could also be an inverse

Head and Shoulders, which occurs after an extended
downward trend and indicates that the price will go
up.

Advanced Guide to Trading 31

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